Wall Street watches a company's quarterly report closely to understand as much as possible about its recent performance and what to expect going forward. Of course, one figure often stands out among the rest: earnings.

We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these earnings surprises.

Now that we know how important earnings and earnings surprises are, it's time to show investors how to take advantage of these events to boost their returns by utilizing the Zacks Earnings ESP filter.

The Zacks Earnings ESP, Explained

The Zacks Expected Surprise Prediction, or ESP, works by locking in on the most up-to-date analyst earnings revisions because they can be more accurate than estimates from weeks or even months before the actual release date. The thinking is pretty straightforward: analysts who provide earnings estimates closer to the report are likely to have more information.

Now that we understand the basic idea, let's look at how the Expected Surprise Prediction works. The ESP is calculated by comparing the Most Accurate Estimate to the Zacks Consensus Estimate, with the percentage difference between the two giving us the Zacks ESP figure.

In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 28.3% annual returns on average, according to our 10 year backtest.

Most stocks, about 60%, fall into the #3 (Hold) category, and they are expected to perform in-line with the broader market. Stocks with a #2 (Buy) and #1 (Strong Buy) rating, or the top 15% and top 5% of stocks, respectively, should outperform the market, with Strong Buy stocks outperforming more than any other rank.

Should You Consider ServiceNow?

Now that we understand what the ESP is and how beneficial it can be, let's dive into a stock that currently fits the bill. ServiceNow (NOW Quick QuoteNOW - Free Report) earns a #2 (Buy) right now and its Most Accurate Estimate sits at $2.13 a share, just two days from its upcoming earnings release on April 26, 2023.

ServiceNow's Earnings ESP sits at +4.34%, which, as explained above, is calculated by taking the percentage difference between the $2.13 Most Accurate Estimate and the Zacks Consensus Estimate of $2.04. NOW is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.

NOW is just one of a large group of Computer and Technology stocks with a positive ESP figure. Keysight (KEYS Quick QuoteKEYS - Free Report) is another qualifying stock you may want to consider.

Slated to report earnings on May 16, 2023, Keysight holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $1.97 a share 22 days from its next quarterly update.

The Zacks Consensus Estimate for Keysight is $1.95, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.29%.

NOW and KEYS' positive ESP metrics may signal that a positive earnings surprise for both stocks is on the horizon.

Find Stocks to Buy or Sell Before They're Reported

Use the Zacks Earnings ESP Filter to turn up stocks with the highest probability of positively, or negatively, surprising to buy or sell before they're reported for profitable earnings season trading. Check it out here >>